GST IMPACT: BUYERS MAY HOME IN ON READY-TO-MOVE-IN PROPERTIES

Even as estate developers are busy preparing and fine-tuning their systems to align with the new tax regime, builders and brokers are expecting real estate sales to remain sluggish for some time as consumers are seeking more clarity on exact tax obligation on their transactions.

Over the past few days, builders and broker’s offices have been receiving queries from existing and prospective customers on how would resale of an under-construction apartment by an investor be treated under GST. Also, consumers want to know if any reimbursement or future payment adjustments are possible from developer’s input tax credit.

“Customers will be in a discovery mode for a while, trying to analyse and follow a secure investment pattern for themselves. And we are talking about an industry which is just about to recover from the side effects of demonetization,” said Prakkash G Rohiira, Director, Karma Realtors. “Allowing homebuyers to be induced into a wait-and watch mode would alter the performance of the industry.”

Realtors reckon that ready-to-move in properties would be preferred by homebuyers now as that segment remains out of the GST ambit. However, such properties are likely to cost a bit more now as these properties won’t get any benefit of input tax credit.

“While developers might still get some benefits for projects that are in nascent stage, they will have to bear the tax burden for ready-to-move in projects since they are kept out of the GST ambit,” said Surendra Hiranandani, CMD, House of Hiranandani.

According to Hiranandani, while the intent is to streamline the tax administration and bring more businesses in the tax net, it is unlikely that GST will have any impact on property prices. He believes that the current rate of 12% on under-construction projects might marginally bring down prices in the affordable segment owing to the input tax credits, but it is unlikely that similar impact will be felt in mid-priced or premium developments.

Last week, the government had notified the goods & services tax rate (GST) for construction of real estate at 18% as against the 12% announced earlier. However, with this rate, the government has also allowed deduction of land value equivalent to one-third of total amount charged by the developer, making effective tax rate same as 12%. According to experts, this revised rate is expected to be tax-neutral as the GST obligation for the property buyer would remain the same.

More clarity is expected to emerge once the GST gets implemented and the government clears its stand on the abatement available for the land cost for calculating service tax on under construction projects. For premium projects where land cost forms around half the total expenditure in cities like Mumbai, apartment prices are likely to rise.